Institutional Determinants of Labor Reallocation in Transition T. Boeri & K. Terrell Presented by Carlo Alberto Miani LM SID /04/2015

Why transition has had so different outcomes in CEE countries and in the FSU? Initial conditions were broadly similar They all experienced the collapse of trade within the COMECON (which dissolved in 1991) Same set of external economic and political shocks

Thesis The gap is due to cross-country differences Labour market adjustment Economic and welfare policies Path of institutional development The timing of transition is not relevant in this context: Large variations in the pace of reform among CEE countries, but all CEE counties have had similar results, because policies were also similar.

Employment adjustment to output

In CEE: Employment adjustment is consistent with output Strong gains in productivity Short-term peak in unemployment, but more jobs in the long term More employment and GDP growth in the long term In the FSU: Dramatic output fall but very slow decline in employment Less employment and much slower recovery

Real wages in 1997 In CEE countries: 15% below the 1989 level In the FSU: 45% below the 1989 level

Job reallocation and structural changes In CEE: Restructuring at a faster pace Less employment in industry and agriculture Fast growth of small business sector and non-agricultural self- employment (2-3 times faster than in the FSU) In the FSU: Most job reallocation is from industry to agriculture Small business and new sector jobs take off at a slower pace In both areas: Most outflows from state sector jobs are due to voluntary quits (layoffs are just 34% of outflows in Poland and 25% in Russia)

Adjustment trajectories In CEE: Fast structural change High unemployment in the short-term In the FSU: Low responsiveness to output changes Strong and persistent wage declines Slower structural change More gradual rise in unemployment What bore the weight of adjustment? Employment in CEE, wages in the FSU

Labour market New labour market, new jobs, new skills required New differences in wages among sectors, jobs and regions Explosion of earning differential at all levels: clear pattern of winners and losers Trade unions are weak and fragmented Labour codes are revised to allow easier layoffs Governments can set minimum wages, but can hardly enforce them

Minimum wages In CEE: At the beginning of transition, they were set at 45-50% of the average wage. By 1995 they had fallen to around 30% of the average wage In the FSU: At the beginning of transition, they were set at 25-30% of the average wage. By 1996 they had fallen to around 6% of the average wage Eroded by inflation  their value declined in real term

Minimum wages as wage floors Unemployment benefits were at the level of the minimum wage Non-standard function: wage-setting Significant difference in Gini coefficient between CEE and FSU In CEE: Generous benefits and high social expenditure Smaller increase in inequality In the FSU: Lower social expenditure and little redistribution Much larger increase in inequality

Minimum wages as wage floors

In CEE: Benefits set a floor to wage distributions and prevent further decline in wages Firms are forced to fire inefficient workers because of wage floors In the FSU: No significant wage floors Firms are allowed to cut wages (in real terms) and even accumulate wage arrears

Conclusion Faster structural change in CEE was due to more productive firms, retaining only high productivity employees, and to more government spending on welfare, which led to less inequality and stronger growth in the mid-long term.

Bibliography Boeri T. & Terrell K. (2001), Institutional Determinants of Labor Reallocation in Transition, Journal of Economic Perspectives, Feb. 2002, Vol. 16,No. 2